It is nearly impossible to know what will happen to the mortgage universe in 2018 but there are a couple of things we are hearing from the experts.
These are particularly important if your mortgage is up for renewal this year as they will allow you to make the best decision for your situation.
Before we dive into that, your mortgage has two timelines to be aware of.
The first is the amortization which is the longer of the two.
Depending on when you got your mortgage this is somewhere between 25-35 years. This is the total amount of time it will take to repay the mortgage.
Within the amortization are the smaller timelines referred to as the term. These vary from six months through 10 years. The five-year fixed rate seems to be the most popular.
Once you approach the end of each term you will likely receive a letter from your lender offering to renew the mortgage. That’s where the following information becomes important.
The first piece is direct from the mortgage default insurers. As a quick reminder that is CMHC, Genworth and CG here in Canada.
According to them, 43% of mortgages in Canada will be renewing this year. That makes it imperative we spend some time making sure people are aware of their options.
The second piece of information is from economists.
They are forecasting rates to increase between .5 and 1% between now and the end of the year. With this second snippet of knowledge we can clearly see that anyone renewing this year had better put this matter at the top of the ‘to do’ list to avoid the increase.
So what should the smart Canadian do?
Call your mortgage provider to find out exactly when your mortgage is up for renewal and what the penalty would be to break the mortgage now.
When your mortgage is up for renewal it is called a switch mortgage. You aren’t looking for any additional funds so all that is happening is the mortgage moves from bank A to B.
The mortgage lenders will cover the discharge fee, appraisal costs, legal fees and can include up to $3,000 of the penalty in the mortgage which means no costs to you.
You will have to provide the required paperwork such as income verification, etc. but it can save you lot of money.
Scenario A – mortgage of $300,000 and the client waits until the September renewal when rates have indeed risen to 3.79% for a five-year fixed rate over 20 years. The payment is $1,780.29/month and you will owe $244,633.26 at the end of the term.
Scenario B – mortgage of $303,000 to include the penalty to break the current mortgage. Current best rates of 2.94% for a five-year mortgage with a 20-year amortization. The payment on this mortgage is $1,652.13/month with a balance of $240,538.57 at the end of the term.
The second option would save you $128.16/month or $7,689.60 over the term and an additional $4,094.69 in overall borrowing costs given the lower rate.
The net savings after deducting the penalty is $8,784.29.
A word of caution. As an industry professional, I will attest that interest rate sheets actually look like hieroglyphics these days given all the changes made to the mortgage rules by the government.
Not all borrowers will qualify for the same rates so make sure you choose a well-qualified mortgage professional to help you through this.
Also be sure to allow yourself sufficient time to make the best decision. It’s your money folks, you should keep as much of it as you can.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.